SEBI Tweaks Framework For Valuing Investment Portfolios Of AIFs

The Securities and Exchange Board of India (SEBI) has announced a modified framework for valuing the investment portfolios of alternative investment funds (AIFs).

Under new rules, the market regulator said that securities, excluding unlisted, non-traded, or thinly-traded securities, will now be valued on the lines of existing mutual fund rules (SEBI (Mutual Funds) Regulations, 1996). 

The circular also noted that the valuation of thinly-traded and non-traded securities will be harmonised across SEBI-regulated entities by March 31, 2025. 

The new rules also entrusted AIF associations with the responsibility of setting valuation rules, specifically for securities that are not thinly traded or non-traded. 

Notably, the circular said that the valuation changes, although significant, will not be considered “material changes”. This means that AIFs will not need additional approvals for adjustments to their valuation methodologies but will have to communicate these changes to their investors.

Additionally, the market watchdog also mandated that independent valuers, involved in such assessments, be registered with the Insolvency and Bankruptcy Board of India. 

SEBI also noted that these valuers should bear relevant qualifications as well as membership in professional organisations like Institute of Chartered Accountants of India (ICAI) or CFA Institute.

Furthermore, AIFs will now have seven months to report valuations based on audited data from investee companies as against six months previously. Additionally, AIF trustees or sponsors will now also be mandated to include compliance with these rules as part of their compliance reports. 

In the circular, SEBI said that the changes will come into effect immediately.

This comes right after stakeholders from the AIF industry submitted feedback to the watchdog on the challenges faced by the ecosystem with regards to the valuation framework. Subsequently, SEBI said that it made changes in the framework based on public comments and internal discussions.

The latest rules come at a time when the SEBI has ramped up the scrutiny of the Indian investment ecosystem. Last month, Inc42 reported that the watchdog directed all AIFs to comply with established certification processes for at least one key personnel in their investment teams.

Earlier this month, SEBI was looking into matters related to side letters or contribution agreements, that govern preferential terms for some LPs in a venture fund.

Last month, the market regulator also notified new regulations to streamline the framework for the registration of foreign venture capital investors.